Kirakoto. I'm Garth Bray and this is Shared Lunch. Today. We're with independent economist Tony Alexander. Another cut in the official cash rate. What does that mean for investors and homeowners alike? What's in store for twenty twenty five? Will things be as rosy or as gray as predicted? All of that? But first, some important information you always need to consider.
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Tony, great to see you. You're zooming in from the Gold Coast. There you look like you're surviving and getting ready to thrive in twenty twenty five. What did you make of the Reserve Bank's OCAR decision?
Yeah, obviously not unexpected zero point five percent. That was what I was expecting, I guess. Ever, since the previous half a percent our cut, a number of people were saying, oh, things are so bad in New Zealand, need to be
cutting by three quarters of a percent. But the story for the past four weeks or so has been people pulling back on those expectations in evidence of that maybe some of the underlying inflationary pressures are not necessarily falling away as rapidly for for next year, at least as people were thinking. For me, the most interesting thing I guess was that their release encapsulated sort of the two
key themes I've been putting across for many months. Number One, intrastrates will fall, but they're not going down to the really low levels that we've seen in the past. And number two, the economy will improve, but it's not going
to be a particularly robust upturn. And that's what we saw with them cutting their economic growth forecast for the years to March twenty six and twenty seven about zero point six percent for each of them, and yet lifting the inflation forecast zero point one to zero point two percent. That I think was quite significant from them.
So if this is a weather forecast, we've gone from mainly fine to scattered showers almost it doesn't look quite as promising as we had first thought. And I mean, look, we've got a lot to talk about here today. We've had a President Trump's election in the US and how that could affect things, and obviously where people see the housing market and go. But I really want to sort of dig in a little bit to some of the
information that we got from Adrian or there. Look, I guess would you be expecting then if we look ahead to February, which is what a lot of people were trying to work out as well, are we looking at a twenty five basis point cut fifty again or something even stronger. Was there any indication that you took, particularly from what was said there well.
In the press conference afterwards, the pretty strong indication was given that they anticipate cutting zero point five percent, and that's pretty much my expectation. It's going to take some fairly either unusually strong or unusually weak economic data between now and then, I think, to cause them to do something different from that. For me, my greater interest is not so much what happens in that third week of February,
but what happens after that. I'm advising people to pull back on their optimism that rates might be falling to a great degree and that mortgage rates will fall away to a great degree. I really don't think that's going to be happening.
Yeah, I guess the ocr is pretty much. It's pretty much back where it was two years ago, right, I mean we had that's when the RBNZ started to really aggressively increase the rates. That was when that seventy five basis point hype took off. I mean, so you don't see another six months of aggressive cuts. It's more like sort of eighteen months of slowly getting there.
No, I think they'll get to about as low as they're going to go before the end of next year. Now the Reserve Bank they project the cash rate will finish twenty twenty five at about three point five percent and the gain get down to three percent at the end of twenty twenty six. I think the easing cycle will be done and dusted well before the end of twenty twenty five, with the cash rate bottoming out somewhere between three three and a half percent if you're lucky.
I think. I recall one forecast I was reading just earlier on talking about maybe a four percent low. Well, we're at four twenty five percent at the moment, so I don't think that's going to happen. But yeah, I think it's going to be done and dusted by the end of next year, especially as the Reserve Bank anticipates extra strengthening and economic growth over twenty twenty six, which of course is going to make people start thinking about
the cyclical upturn in inflation. And that's where my mind is focusing on at the moment, not the weakness in the economy at the moment, the falling away of inflationary pressures right now. But when does the cyclical recovery in inflation start? And that I think is going to be occupying people's minds in the second part of twenty twenty five.
Why is that so important to be thinking about now?
Ah, because it limits the extent to which the medium to long term wholesale interest rates are likely to go down. We see elements of that are now, and therefore the extent to which the medium to long term will even two years plus fixed mortgage rates go down. And so the time when people maybe more seriously start thinking about not fixing six months and fixing for two or three years, I think it's going to come sooner than people are thinking.
If you're talking about that long term picture, why is that so important to be thinking about it now?
Because at the moment there's a high degree of optimism amongst I think the general population, investors, potential home buyers, that the interstrates cycle is going to be a really generous one, that the interustrates are going to fall away to a strong level, the economy is going to grow strongly,
and the risk is people start making mistakes. Investors will bet on the interest rates going to low levels, so they risk over committing themselves to interest our sensitive stocks, maybe commercial property, where of course the prices can be highly correlated with the other direction for the interest rate movements. For businesses also thinking oh my goodness, we're going to see a great upturn in the economy because interest rates are going to go so low. I do not need
to restructure at the moment. I do not lead to lay you off as many staff and find alternative supplies of materials because there's going to be all these extra customers coming through. It's going to be okay. Well, you know, for many, many months, I've been trying to emphasize to business people in particular, the upturn will be mild. Don't think about just surviving to twenty five and thinking you're going to thrive in twenty five. It's going to be
a relatively mild recovery. Therefore, continue with your cost cutting, continue with trying to find efficiencies and boost productivity.
Can you see why the psychology might Can you see why the psychology might be affecting people that for so long interest rates will we're so low that perhaps there's still a little bit of that hankering back to that period of didictability and an expectation that somehow we're going to return to that as the norm when there's a completely different normal now available.
Yeah. Yeah, But that's why in my weekly publication, I have a set of graphs at the on about the final page or the one before it, looking at where the fixed mortgage rates have gone over the past few years. I go back about fifteen years something like that, but I completely blank out the observations that the line stops and restarts again. For the period twenty nineteen, when the world was worried about deflation, the cash rate was only
one percent in New Zealand, I wipe that out. I wipe out twenty twenty and twenty twenty one because they were pandemic years, very unusual circumstance. So what I'm trying to get people to do is realize, well, actually, the likes of the three four, five year fixed rates are pretty much already below their average levels for the past ten years or so leading into twenty and nineteen, and maybe that start people thinking a bit more about not so much fixed six months. Maybe I'll start fixing longer.
Having said that, he was just love to fix for the short term interest rates. Hardly anyone ever goes beyond three years, and that'll stick around this cycle.
We're a long way from that American example where people lock in for thirty years or whatever. Right, it's just part of the psychology.
Yep, yep, and that generally that's worked out. Okay, So if you look at the plot post GFC environment two thousand and nine through two, you know, eighteen to nineteen actually just rolling one year fixed gave the lowest cost of funds compared with going two year FX, three, four or five years over that period. But of course you don't have much rate certainty. You're leaving yourself vulnerable to
something coming along and comeblue it. And of course the world that we live in is one which is very uncertain. We're all trying to figure out, you know, with the Trump presidency, what does that actually mean for inflation. There's a strong view on what it means is the but what does it mean in New Zealand scope for inflation and interst rate surprises is going to be really strong in the next four years.
I do want to try and get to some of that shortly, but let's just stay a little bit with that bigger picture here. If we've got a more subdued recovery through twenty twenty five, as you suggest, what is that going to do for some of the big pain points we've seen, like unemployment or the labor force participation
rate and so on. We've seen some pretty high profile examples of entire businesses or even industries that are looking like they're really under pressure after the energy crunch, you know, mills shutting down in regional towns and just decimating that area. Is there more of that to come? Do you think?
I think there's more to come across all sectors in the economy. For a long time I was warning that twenty twenty four would be a year of weeding out in the business sector across all sectors, so not just key pressure points like hospitality, the retail, house construction are widely defined. But of course, as we can see with the loss of a feeling of security about electricity availability and the price that's feeding through to those long term
investment decisions in the electricity. In the manufacturing sector highly dependent upon electricity, and this is one reason the upturn in New Zealand's economy is going to be muted. Businesses are whether you're already here in New Zealand or eure overseas thinking about investing in New Zealand, are going to have to think about the electricity availability. And you look at something like the data centers which are opening up in New Zealand. Estimated within about five years they're going
to be using five hundred megawatt of energy. By then, that'll be about twenty five percent of what's used by Auckland households. It says that the electricity availability is going to get even worse, especially if people keep plugging in more electric vehicles and maybe electric scooters and things. So that's quite a change in New Zealand's dynamic where since all the hydro electrics ends were developed into the late nineteen seventies, there's been a feeling of electricity is readily
available in New Zealand. That's a sea change in view this year. So there's probably a bit more of that. Unfortunately it's rolled through part of the manufacturing sector.
Let's try and give people some hope. Do you see any green shoots in there? Are the any investment decisions that are likely to proceed in this uncertain environment?
Oh? Look, we are undoubtedly looking at an improvement in the New Zealand economy. When I've been giving talks over the past star three to four months and I've been running through my long list of reasons why we're not going to thrive, I have to stop myself about every seven minutes and say, now, just to remind you, we asked going to see a recovery in the New Zealand economy.
But it's going to be more like when we came out of the global financial crisis, where the peak rate of growth was about four point one percent in twenty fifteen. It took a long time for things really to get chugging along. It's not going to be for this cycle or repeat of coming out of the recession ninety seven ninety eight when we were growing six percent within eighteen months, or coming out of the nineteen ninety one recession when we were also growing six percent within about two and
a half years. This is going to be a relatively mild upturn and some of the factors contributing to it will be obviously the intrastrate or the foot on the pedal being lifted off the brake by the reserved bank, so taking off intrastraight restraint, not putting on intrastrate stimulus. As I think what I'm saying to people, they're not going to put the foot on the extra salrator by cutting the cash right to two and a half percent, but thank goodness, they'll be taking the foot off the brake.
There's a lot of.
Infrastructure spending to be done in New Zealand over the next world century, quite frankly, so there's going to be a lot of firms actively involved in that. There are some early signs of stand alone house construction starting to look better through twenty twenty five, not multi unit construction, townhouses, et cetera twenty twenty six if you're lucky, but for the standalone houses, things are starting to look a little bit better.
There.
There's been a good improvement in dairy prices recently, so that will feed through, especially into your Taranaki Wycaddow, South Canterbury Southland regions, So that's positive across here in Australia at the moment. There's just people are noting there's some reasonably good upward pressure on red meat prices for a variety of reasons. So maybe there's some hope for our red meat sector in New Zealand where about forty percent of them are still running at losses at the moment.
So there are those positives. The tourism numbers slowly improving and the net migration numbers. I don't think they're going to go into the negative territory some people be forecasting a few months ago. Maybe we bottom out with an annual flow around about forty thousand or so, so down from a year ago one hundred and thirty six thousand, but are still in the positive territory.
I want to pick up what you said about standalone construction there, and obviously that's an indication of some pretty firm intensions that people are prepared to take a bed on where interest rates are headed and so on. But I noticed in one of your recent Invests briefings you were saying that investors are really shying away from new builds. What's going on there?
Yes, yeah, I think for the investors, they can see that there are many properties listed for sale, so the number stock of listings for buyers generally is the best since twenty fifteen, up about twenty six percent from a year ago. And the focus for buyers generally is on those existing properties maybe where they can make some changes and improve the yield. So as an investor, you're not just looking at this is what it costs, this is how much I'm going to borrow, this is the rent
I'm going to get, And it's a simple equation. You just plug it in and where you go. As an investor, you might be looking at, Okay, well, here's a property with subdivision potential somewhere down the track. Here's a property where I could think about adding or taking away your room or garage or doing something. So frankly, it's more fun buying an existing property as long as it's not a townhouse, than would be the case just buying something
essentially or off the rack. I can see from my various surveys, the real estate one in particular, that I do that the investors are now coming back into the market that are obviously encouraged by the restoration of interest expense deductibility, bright line changes and interest rates are going down. But yeah, they're very weary of what they see happening, especially in the multi unit housing area, the townhouse area. There are obviously some big problems in one or two
areas there. There's an oversupply. For the moment, there's only temporary of townhouses up in Auckland, and there's I think, just to concern that they may look to make a purchase, but maybe I'm not going to get attend quite as quickly as they would hope. That will change down the track and the investors will start looking more favorably at new construction and townhouses in particular, but just not at the moment.
But that's I guess going to keep a bit of a clamp on the supply, and that's going to dissuade some of those developers from developing at scale, right, which is just going to keep that, you know, keep people focused in that established property market.
For the developers, certainly if the multi unit are complexes, they can't get the pre sales at the moment and they're not going to get the finance from the financial institutions, and so that that's why I think maybe for some of them. If they're still looking to be builders, they may be biasing back towards purchasing sections and building something rather than going down the townhouse route. For the moment, New Zealand cities need to intensify, so this is definitely
going to come back again. The difficulty here is that we have decades of data on standalone house construction. You know, we've got the graphs going up and down. We can see what happens. The numbers usually bottom out around about fifteen thousand consents. We've done that, it's starting to slowly edge up for the multi units. For the townhouses, basically, we don't have any cycles at all. This is the first decent downturn, so we really don't know how low
it's goning to go down. And that's why, frankly, when we're economists are talking about house construction the levels of activity, we're sort of all over the place at the moment because we don't We've got a feeling for the standalone house construction, but for the multi unit, no history gives me zero guide on when that's going to start picking up again. On the construction, I.
Won't hold you to it until we get the results in I guess in terms of those new home buyers, obviously the debt to income ratio changes that have come in and so on, is that starting to filter through from what you can see.
Yeah, for the DTI is there you know, twenty percent is a reasonable exemption quite frankly for banks, you know, to lend above us seven times income for the investors and six six times for other people. So you know, there are still quite some good scope in there. But as the as the market heats up and prices rise more for the existing houses, we will see people start to look back at getting something built, but that the
numbers don't really work out out there. Relatively cheaper for most people to be looking at purchasing and already constructed property than getting something built. Now. You know, when I look at the cost of building materials, there have been some decreases, but it's relatively mild. I don't think there's much of an extra decline in the cost of construction
that's going to come along. And you know, when we've been talking for some time about forty percent increases in the materials costs for building a residential property in New Zealand in the past four years, you find the same numbers if you're looking at material out of Australia or out of Ireland, for instance, and there is not an expectation that that goes backwards at.
All of a sudden.
Everybody's building lots of standalone houses, a lot of these extra costs are locked in. So for home builders, it's like they're going to have to actually wait until we get a decent increase in the prices of existing houses. And you know, for twenty twenty five, you know, I think it's reasonable to think that house prices on average rise five seven, maybe slightly more percent, and there maybe a little bit more than that over twenty twenty six.
So the time will come for the higher residential construction. But I think the pace of price increase is going to be relatively mild the next couple of years.
Now, you're coming to us from the Gold Coast, so I want you to quickly inflame people by telling us how the property market's been working over there. Just by way of comparison.
Yes, well, you've got the baby Boober generation and the one below that cashing up out of the major cities and they're selling four or five million dollar houses and Mosman and other flash places across in Sydney and they prepared to lay it down on one hundred and fifty one to eighty square meter apartment. Here on the GC, there's all these towers going up all over the place. They build them really quickly, you know, two years from go to woe for a twenty seven story building just
down the road for instance. The demand is massive for property here. There was an estimate from a evaluation group yesterday noting that on the GC they need to build for expect population growth, fifty skyscraper apartment blocks each year over the next few years for the population growth. What it adds up to is demand is so strong and supply is crimped. Remember cost materials have gone through the roof.
Prices on the GC have gone up on average seventy to eighty seventy to eighty percent for apartments in the past four years. Demand versus supply, that's what happens. Get out really yeah, yeah, it's quite extreme. It's totally different from the cities, the eight capital cities around Australia where actually there's falling prices at the moment in Sydney and Melbourne. Not sure about Brisbane, but the markets can be heavily influenced in the cities by what's happening with migration numbers,
which have been relatively strong. But there's a bit of a movement still of some people to the regions, and that's a dynamic. We don't get to the same extent in New Zealand during the pandemic. Yes, some keiw's sold in the cities and moved to the regions, but probably we're talking the older gen who we're going to do it anyway, and they just brought forward those plans maybe by three years of selling in Auckland and going to
have lock North, Hastings other places like that. It's a stronger phenomenon in Australia of people moving out of the cities and into the regions as the numbers are greater.
Gosh, if you can swing a hammer, get to call and gatt a straight away. Look, I'm interested. We mentioned the uncertainty that's been created in the world by the US presidential election. People trying to work out what's going
on there. I mean, I know it's MAGA is the acronym, but it's almost like vuoka volatile uncertain complex and forget ambiguous as the last one is that a pretty fair depiction of how investors are looking at what that election means for the prospects of growth and where rates and where exchange rates and things are going to go, and how that could affect our economy.
Yeah, I mean the investors are scrambling around trying to figure out exactly what this means. Now. Clearly with the cryptocurrencies have rally done very strongly. I mean, are just purely a speculative A said anyway, But the speculation is that President Trump has been saying some nice things about it, and Elon Musk is in there, and he's got his own dough doge coin I think it is if it still exists, and the department that he's heading there has
got the same dog acronym. There are first letters, so people are looking at that asset. There's a feeling that maybe inflation in the United States is going to be high than would otherwise be the case because of the tariffs which are going on materials goods going into America. Already, firms in Australia are holding pre tariff increased sales by now before the price goes up for goods coming in
from Mexico from Canada, China et cetera. Of course, what we don't know is how much of all of these threats for tariff changes are really just bargaining positions to get something else in exchange, either better trade access or something of relevance in the geopolitical sphere, for instance. We cannot know, and so this is going to be an environment of high uncertainty for the next two four years,
et cetera. For New Zealand, the risks lie a bit on the downside here because we export minimally processed commodities to the rest of the world. A lot of the rest of the world has strong farm lobby groups who would like our stuff not to be going in there. And if we're looking at a world reverting more towards mercantilist policies of tariffs to somehow protect your domestic producers, manufacturers, farmers, et cetera, we do risk getting a bit lost in
the wash there and having some negative outcomes. So the environment for ourselves has become riskier over for the next four years, and that may just constrain some investment in New Zealand in this period of time. The intrast rate implications difficult to figure out, but I'd say interest rates again not going as low as people are thinking because of enhancement of the inflation risk.
If we were trying to wrap it all up, what's your best advice for how to make the best out of twenty twenty five, Tony?
I think people anticipates in recovery in the economy, the labor market improving. You asked earlier on Garth about the unemployment RATEE. You know, we're four point eight percent at the moment, go to five point five percent. I guess I'm not greatly concerned about that. We had six point seven percent back in about twenty twelve. I think eleven point one percent or so back in about nineteen ninety two. You know, we've seen far higher unemployment rates in the past.
That will act as a constraint on the strength of recovery and consumers spending for a lot of twenty twenty five. So I think there's more rationalization to come in the retail, hospitality are sector. And because we're in sort of the last stages of the weakness for the economy, that doesn't mean things improve for businesses generally. As we see that the failure's liquidations are picking up because some firms do not have the care flow for the final three to
six months of the period of weakness. It mike the ird demanding tax payments, etc. We will see further weeding out across all sectors, but the scene is being set for better activity in our economy, mainly the second half of twenty twenty five and twenty twenty six rather than the first half of twenty twenty five. Conversely, for the biggest parts of the falls and interest rates, that'll be done and dusted, I think, quite frankly by the middle of twenty twenty five.
Craky, So it sounds like Merry Christmas twenty twenty five than Merry Christmas twenty twenty four from your point of view. Thanks very much, Tony, and thanks all of you for watching and for listening. If you're listening, you're probably on Spotify, Apple or WV podcasts. If you're watching, you're on YouTube. And if you like what you see, let us know and let us know what you'd like to see next for us. That's done, Quimitu